CHINA AND GREECE LEAD FRIDAY SELLOFF -- FOREIGN UPTRENDS, HOWEVER, REMAIN INTACT -- THAT KEPT U.S. STOCK INDEXES IN TRADING RANGE AND NEGATED UPSIDE BREAKOUT IN NYSE INDEX -- FALLING GERMAN YIELDS (AND RISING PRICES) MAKE TREASURIES A RELATIVE BARGAIN
CHINESE ETFS DROP 5% ON FRIDAY... Chinese stocks have been on a tear over the last year. Mainland stocks are up 25% just this year. They were probably due for a pullback and they got one on Friday. Chinese authorities tightened rules on margin buying (and made it easier to do short selling). But they did it after the Chinese stock market had closed. That explains why the Shanghai market showed gains on Friday. The selling was reflected in Chinese ETFs which trade all day. Chart 1 shows the CSI 300 China A-Shares Fund (which tracks stocks in Shanghai and Shenzen) tumbling 5% in heavy trading. The ASHR, however, still remains above its 20-day moving average (green line). China iShares (FXI) lost 4% on the day. The weekly bars in Chart 2 show the FXI suffering a downside weekly reversal (losing 1.5%) on the week. The FXI recently hit a new seven-year high. Its 14-week RSI (top of chart) had reached overbought territory over 70 which also suggested that a pullback was due. Even with this week's selling, its uptrend is still very much intact.
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Chart 1
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Chart 2
GREEK STOCKS TUMBLE... Greek stocks fell 3% on Friday and lost nearly 8% on the week. The weekly bars in Chart 3 show the Dow Jones Greek Index ending at the lowest close in three years. That caused profit-taking in the rest of Europe (and pushed even more money into the safety of German bunds. More on that shortly). Germany, which has been the strongest European market, was one of the hardest hit. The DAX lost 5.5% during the week, while the Stoxx 600 Europe Index lost 2.2%. Their uptrends, however, are still intact. The daily bars in Chart 4 show the German DAX Index losing 2.5% on Friday. Its 14-day RSI line (above chart) has fallen below its 50-line. The DAX has gained 40% since last October and is certainly due for a pullback. It still remains above its 50-day moving average. The DAX remains one of the strongest markets in the world and hit a record high earlier in the week as shown in the monthly bars in Chart 5. Its 14-month RSI line, however, shows it to be in an overbought condition.
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Chart 3
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Chart 4
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Chart 5
STOXX EUROPE 600 INDEX REMAINS IN RECORD TERRITORY ... The Stoxx Europe 600 Index recently hit a new record high. It remains in record territory. The weekly bars in Chart 6, however, show the index losing 2.2% this week to suffer a downside weekly reversal. Its 14-week RSI line also shows it to be in an overbought condition. A weekly close below its 2007 high near 400 might be some cause for concern. So far, however, little damage has been done to its uptrend. The daily bars in Chart 7 show how little damage was done by this week's pullback. The STOXX 600 remains well above its last March low at 390 and its 50-day moving average. A negative divergence on its 14-day RSI line shows that it was due for a pullback. It would have to fall below its 50-day line to signal that Greek concerns were starting to take a heavier toll on the rest of Europe.
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Chart 6
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Chart 7
S&P 500 SLIPS BELOW ITS 50-DAY LINE... My Thursday message shows the S&P 500 testing the upper line in a triangular formation. Friday's 1.1% loss however, pushed the SPX back below its 50-average and back to the middle of that price pattern. Trading volume also picked up (although that was largely due to options expiration). Small caps took a bigger hit. Chart 9 shows the Russell 2000 Small Cap Index dropping 1.6% on Friday. The RUT, however, remains above its 50-day line. A bigger disappointment occurred in the NYSE Composite Index. That index hit a record high on Wednesday. Friday's close back below its February peak called that upside breakout into question. [At major upside breakouts, it's important that the breakout hold through a Friday close].
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Chart 8
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Chart 9
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Chart 10
GERMAN 10-YEAR YIELD NEARS ZERO ... Another side effect of Greek problems is a flight out of Greek bonds (whose yield surged this week) into the safety of German bunds (whose yield fell). Eurozone quantitative easing also has a lot to do with the plunge in euro yields. That helps explains why U.S. Treasury yields are remaining so low. The blue line in Chart 11 shows the 10-Year German yield falling to 0.08% this week. That's the lowest level in history; and a move into negative territory (below zero) may be in the cards. Meanwhile, the 10-Year Treasury yield (green line) ended the week at 1.85% which was the lowest close in two months. There's a relationship between the two lines. With eurozone bond yields so low, the higher yields in the U.S. look a lot more attractive. European buying of Treasuries is one of the reasons that Treasury prices are still rising and yields falling. Plunging eurozone yields are also forcing money into European stocks, and offer some insurance against any serious stock setbacks in that region.
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Chart 11
INVERTED YIELD CHART SHOWS WHY TREASURIES ARE A BARGAIN... Another way to compare German and Treasury bonds is to look at their relative "price" performance. One way to do that is to simply invert their respective yields (since bond prices and yields are inversely correlated). That can be done by placing the minus prefix in front of the bond yield (-$UST10Y). Chart 12 shows how well German bund prices are doing relative to Treasury prices. When foreign yields are lower than U.S. Treasury yields (and falling faster), that means that foreign bond prices are higher than Treasury prices (and rising faster). That makes Treasuries a huge bargain to foreign investors. [A Wall Street Journal article this week pointed out the Japanese investors are also buying U.S. Treasuries because of historically low Japanese bond yields.] Foreign buying of Treasuries also explains why bond yields are dropping even while the Fed is talking about hiking short term rates.
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Chart 12
TIPS HAVE A GOOD WEEK... Most bond categories in the U.S. gained ground this week. That defensive buying was most evident on Friday as stock prices fell. TIPS were the strongest bond performers. The daily bars in Chart 13 show the Barclays TIPS Bond iShares (TIP) jumping sharply on Friday to the highest level in nearly three months. [TIPS stand for Treasury Inflation Protection Securities]. Friday's report of an uptick in the Consumer Price Index may have contributed to TIPS buying. A bounce in crude oil (and most other commodities) may have also contributed. My Thursday message showed the U.S. dollar starting to weaken. That may contribute to further commodity gains, and may also encourage more buying of Treasury Inflation bonds.
